Rod Oram: The Budget that fudged it

ROD ORAM

THE GLOBAL financial crisis confronted Finance Minister Bill English with two big challenges in his first budget: to improve the government's books; and to transform the economy.

He passed the first, easier test. But he did so at a cost. He has made New Zealand more vulnerable should our economy, or the world's, worsen over the next year.

He failed the second, much harder test. By scrimping and saving to make his books look better, he has seriously set back efforts to make this a bigger and more resilient economy.

Given global economic conditions, he should worry a lot on both scores. World markets have achieved at best only "rudimentary signs of stability", Treasury said in its forecasts on which English built his budget.

It estimates our economy shrank by 0.9% in the year ended March and will contract a further 1.7% by March 2010 with, for example, business investment falling 23%. It expects growth will resume some time after this September but reach only 1.8% in the year ending March 2011.

These are sharp downgrades from Treasury's forecast last December. And Treasury's latest downside scenario is even gloomier: a contraction of 1% in the year to this March and a further 2.8% by March 2010 and then growth of only 0.8% by March 2011.

In this case, unemployment would peak at 9.8% in March 2011 with up to 217,000 people jobless, a doubling from this March. House prices would fall 20.4% from their December 2007 levels.

We need to take the downside scenario seriously. Consistently through the global crisis events have turned out worse than forecast. As the IMF pointed out in its global forecast last month, there is a substantial risk that the world economy will contract more sharply this year and take longer to recover than its central estimate shows.

While other governments have devised a range of aggressive programmes to counter the worst of the contraction, ours has come up with only a few modest ones: the nine-day fortnight helping a handful of companies, the ReStart programme helping 1400 families with a newly unemployed breadwinner, a minor relief package for small businesses and acceleration of $500 million of infrastructure spending.

Nothing in the Budget suggests the government is ready for a bigger response if it is needed.

The Budget is also very disappointing on spending disciplines. Despite all its tough talk about value-for-money in opposition and in its first six months in office, National has found only $500m a year of savings out of an annual budget of $65 billion.

Worse, it has cut funds crucial for helping companies overcome the current global turmoil. For example, it has axed $101m over four years from New Zealand Trade & Enterprise's market development fund. Similarly, some of the $50m seed money for the National Cycleway, a very long-term project, is coming from budgets the tourism industry desperately needs now to attract travellers.

Most surreal of all is National's overall spending strategy. The finance minister and prime minister told parliament how proud they were to sustain "entitlements" such as Working for Families and zero interest student loans, programmes National had railed against in opposition.

English blew his only chance to radically reshape government finances to put them on a more sustainable footing. He should, for example, have started the long journey to delivering help to the low paid through the tax system rather than the inefficient Working for Families. And he should have begun the equally long and difficult road to raising the superannuation age.

From here on his political capital will ebb away. Moreover, hopefully, the pressure of the global economic crisis will eventually ease. Political and public support for fundamental change will only weaken. The closer he gets to the next election, the more reluctant he will be to embark on true spending reform.

That will leave English tinkering with rising desperation to contain costs within existing structures and his 1% a year cap on new spending. This means that either public sector employees will get no wage increases or there are big cuts in service levels to come.

So lacking a strategy on spending, English resorted to two easy, big ticket items to reduce budget deficits and to bring projected debt levels down a decade from now. He postponed tax cuts and contributions to the Superannuation Fund for many years to come.

Both tactics help the government look better in the short term. They reduce the deficit and thus the government's debt and interest costs. But the long-term cost of both is high. Without tax cuts, household debt and interest payments will remain higher. Without investment in the Fund, super costs will require a much bigger chunk of tax revenues a couple of decades from now.

The government doesn't expect to resume contributions to the Fund for at least 11 years. That means the Fund will be deprived of $19.5b of new investment. Based on historic market performance, that capital would grow substantially, easily exceeding the interest cost on it.

Suspending investment for a decade or more will stunt the Fund. The government of the day will have to fund a higher proportion of super out of current tax revenue. Either it will have to raise taxes or cut pensions. If today's taxpayers want a decent pension two decades from now they should accept that borrowing to grow the Super Fund is a sound investment strategy.

Of course, theoretically the government of 2030 could escape English's fiscal and demographic time bomb by inheriting a much bigger, stronger economy.

To do that "we need to do 200 things right", English said in his pre-Budget briefing. He said the government had made a start with two more infrastructure spending and less regulation.

More roads and less red tape might get our cheap commodities to the docks faster but they won't make us smarter.

His only Budget gestures towards true transformation were a handful of unco-ordinated, strategy-devoid dollops of money for science, CRIs and a few other good causes.

For example, English replaced the previous government's Fast Forward Fund for primary sector research with the Primary Growth Partnership. The former was a public-private partnership with $700m of government funding matched by industry money over 10 years.

The latter is worth only $190m over four years plus matched industry funding. And it has been pulled back into direct government control, so it will be vastly more bureaucratic. Similarly, National won't commit to skills training. It won't implement the tripartite Skills Strategy that Business New Zealand, the Council of Trade Unions and the previous government crafted.

Worse, the Budget starved the tertiary sector. Education Minister Anne Tolley is so obsessed with implementing national standards in secondary schools she has ignored higher learning. The derisory increase in the tertiary budget means less money for teaching salaries and less for the surge of students trying to register because they can't find jobs.

Overall, one can only wonder at how English has spent his first six months in office. He has been so focused on achieving one line on one Budget chart a gently declining government debt level 10 years from now that he has compromised the present and forfeited the future for New Zealand.

- © Fairfax NZ News